Chapter 4 - The Insurance Cycle Flashcards
Supply and demand
Relationship between price of the commodity and the quantity traded. Relies on luck, historical information and weather
Tools to manage supply and demand
- Historic information: trading patterns
- current information: sporting fixtures
- competitive pricing
- exclusivity of product
High order and low order service suppliers
High order service: London store exclusive. Large sphere of influence.
Low order service: local milk supplier . Low sphere of influence.
Shops have no control over…
Competition in local area
Data used for forecasting or decision making being accurate
Necessities vs Luxuries
Necessities: change in price will potentially have less impact on demand than if item is luxury
Insurance would not be a luxury as many compulsory
Price elasticity of demand
If price of product/service goes up demand goes down- elasticity is determining how much by.
Degree of elasticity is important
If you know demand will drop by more than 10% if you raise price by 10% it’s not worth it
Equilibrium
Under-supply
Over-supply
Equilibrium- just enough supply to meet demand
Under-supply - not enough
Over-supply - more than enough
Why new insurers join the marketplace
If they think there is greater demand than current supply
Not in equilibrium because of under-supply
This can lead to an impact on price if insurers start to compete
Subscription market
Number of insurers within a market taking shares of the same risk depending on their appetite and capacity
Why insurers leave the market
Suffer large losses
Lower profits
Impact on rates of new market entrants and leavers
New insurers come into market increasing capacity
Prices are forced down as there is more supply than demand and aggressive pricing can take place
Losses are made or lower profits and insurers leave market reducing capacity
Prices are high and higher profits can be made
Hard market
Soft market
Hard market = excess of demand over supply. Insurers have more ability to influence rates due to less capacity
Soft market = excess of supply over demand. More difficult for insurers to push prices up.
Legal and political influences
- Law might be changed to make certain types of insurance compulsory
- Law might be changed to extend liabilities for which insurers can be found responsible
- Ability of market to write business in certain parts of the world might be increased
Impact of major events
Shortens the insurance cycle by accelerating reduction of players, significantly increasing premiums
